Why create a holding company in Latvia?
The Benefits of a Latvian Holding Company
Latvia’s main advantage, its ability to retain profit, lies in the fact that it is a member of the European Union. Latvia benefits from EU agreements on trade between parent and subsidiary companies (holding company and subsidiaries). Directive 2003/123/EC states that the income from a subsidiary passed on to the parent company is not taxed at source (if, of course, the subsidiary is based in a member country of the EU). The subsidiary is, therefore, taxed according to the tax system of its jurisdiction, and then sends the resulting income, minus tax, to the parent company, without any further taxation at holding level. Income arrives in Latvia (from foreign subsidiaries) and is not taxed (income from subsidiaries has not been subject to tax since 1 January 2013). However, in order to use these profits, it is necessary to have another holding company above the Latvian company. This parent company is set up in a zero-tax offshore jurisdiction such as Ras Al Khaimah and receives the income sent by the holding company in Latvia. Once this income arrives there, it can be used freely and is not taxable. For a diagram of the functioning of a holding company in Latvia, see the below diagram*.
Example: Joe Blogs creates a holding company in Latvia owning subsidiaries in France or Germany to carry out its trading activities. He generates EUR 100 000 in profit in his French company, on which the company pays a tax of 33% (i.e. about EUR 33 000) in accordance with French tax rules. If this were his only company then his income would be taxed at a minimum rate of 40%. However, instead he has his holding company in Latvia, to which he passes the French income after French tax is paid. The remaining EUR 66 000 is then transferred to Latvia without withholding tax (EC Directive 2003/123/EC) and taxation on arrival (Latvian law of 2013). In order to use this sum it is again moved, this time to his second holding company in Ras Al Khaimah, where they are not taxed (0% taxation). EUR 66 000 is then fully available.
* Fidusuisse is not liable for changes in legislation or for the use of a corporate structure without prior legal advice. These diagrams and assessments are provided for information purposes only, and the author cannot be held liable on the basis thereof.
Caution: Tax structures may in some cases be considered tax fraud, tax evasion or an abuse of rights. The diagram above may be illegal in some countries, and while it gives a quick overview of international practices, it cannot be considered definitive or applicable on the basis of the illustration presented. If you are interested in such a setup, you must consult a qualified advisor.